Tax troubles likely to lessen

SummaryThe Budget makes many welcome changes to taxation though it falls just short of expectations by not scrapping the retrospective tax law

From a tax perspective, the welcome changes Budget FY15 brings are the extension of the sunset date for power units to March 31, 2017; the additional allowance of 15% on investment in plant and machinery exceeding R25 crore; lower withholding tax on foreign bonds, at 5%, across sectors; pass-through status to REITs and infra trust; dispute mitigation provisions; time-bound clarification by CBDT and CBEC; extension of Advance Rulings to residents and transfer pricing proposals like roll-back benefit in Advance Pricing Agreements (APAs); a range concept substituting the the arithmetic mean for computing arm’s length price; and allowing the use of multi-year data for TP benchmarking.

The FM also sought to resolve the long-standing complaints of FIIs on the difficulty faced in the characterisation of their income arising from transaction in securities—whether they are to be classified as capital gains or business income. It has now been clarified that all such income will only be classified as capital gains income and fund managers managing funds from India will not risk any adverse tax consequences.The dampener surely has been the FM’s reluctance to roll-back the retrospective amendment on indirect transfer and the continuation of the minimum alternative tax and the dividend distribution tax (DDT) for SEZs. There has been no increase in the tax rates. However, the rationalisation of the calculation of DDT has raised the effective DDT tax rate to 20.47% from the present rate of around 17%. Long-term capital gains on debt mutual funds and unlisted securities will now be calculated with reference to the holding period of 36 months as is presently applicable to all assets (other than listed equity oriented securities).

The other daunting task the FM has decided to tackle is the fiscal deficit. In the Budget speech, Jaitley spoke of curtailing subsidies, with the government setting up an Expenditure Management Commission to look into government spending, including that on various subsidy heads—food, fuel and fertiliser. This will however take time.

The second way to tackle fiscal deficit is generating more resources. The Budget has many steps to bolster the manufacturing and infrastructure sectors as well as for stabilising taxes, which are likely to increase revenue. The raising of the FDI caps in insurance and defence manufacturing will help. However, these steps might not be enough and hence, the FM will have to rely on disinvestment. With strong stock market and investor confidence, he might